The National Assembly has adopted the Law on Tendering or the Law onPublic Procurement, which is expected to encourage a more competitiveenvironment for government bid packages. Le Net and Thai Huynh Ngoc KimNgan at LNT & Partners take some highlights on the document, passedon November 26, on Vietnam Investment Review.
TheLaw on Tendering will come into effect on July 1, 2014. Notable changesinclude the repealing of Section 1, Chapter VI of the Law onConstruction (N°16/2003/QH11) and Article 2 of the Law Amending andSupplementing a Number of Articles of the Law relating to CapitalConstruction Investment (N°38/2009/QH12). With these changes, the newlaw will resolve the overlaps between the Law on Tendering and otherlaws such as the Law on Construction.
Aimed ataddressing certain loopholes and issues related to the current legalframework on procurement, the new Law on Tendering was intended toprovide new provisions to clarify these issues. It devotes a separatechapter to each of the following subjects:
Selectionvia online or e-procurement mechanisms to help simplify the biddingprocess and implement legislative information disclosure requirementsfor better transparency throughout the bidding process and projectimplementation;
Several options, includingapplication of modified criteria (specifically on cost and contractorqualifications), in the evaluation of bidding dossiers by biddingorganisers; and
Involvement of foreign contractorsbeing made subject to two new conditions; namely, that they must (i)work in partnership with a Vietnamese company or sub-contract a localcompany; and (ii) employ only foreign workers when there are noqualified Vietnamese workers available for the project.
As such, the amended provisions are also designed to support localcontractors participating in international projects. In addition, theLaw on Tendering also includes many new terms and some new principlesthat aim to actively enhance competitiveness, decentralise publicprocurement and promote anti-corruption measures. It also introduces anew scope of application for official development assistance (ODA)projects. It is expected that the implementing regulations will rein inODA projects to a more efficient level. Ideally, the regulations aim todetermine the steps towards controlling procurement activities, ensuringfairness between the parties, and limiting corruption.
There are two examples where the Law on Tendering has proven its efficiency.
Total estimated costs and the procedure for bidding supplements
During the process of implementing the winning package, contractorsoften apply to adjust costs of the project scale related to the bid costadjustment. Actual evidence shows that many projects are won by bidsthat are deliberately lower, but which later apply for an adjustment inthe scale of investment leading to increased levels of investment.Therefore, this new regulation is intended to overcome this issue,through the appointment of sub-contractors via bidding. As a result,this regulation should contribute to restricting wastage of the statebudget.
Responsibility of competent persons in bidding and direct appointment of contractor
Regarding the determination of competent persons, the regulation asdescribed in Article 4(3) is a step forward. This allows quick decisionsto be made on small packages. To avoid the downside of this regulation,the responsibility of the authorised individual is clearly defined. As aresult, this restricts the abuse of power by an authorised individual,closes a loophole and creates a healthier bidding environment.
However, apart from progress on this issue, there remain a number ofpractical issues that should be supplemented and rectified in thedecrees implementing the law.
Broad definition of state capital
The provisions of the applicable object are always a matter ofcontroversy and present an interesting point. This law provides thatprocurement activities include “implementation of investment projectsdeveloped by organisations other than those specified in points a and bof this paragraph may use state capital, capital of state-ownedenterprises, 30 per cent or more or less than 30 per cent but more than500 billion VMD in total investment of the project be approved”.
Article 4(44), closely outlines the definition of “state capital”. Thelaw defines state capital to include both equity and loan capital forthe purposes of this provision, including capital of State-ownedenterprises or loans that are guaranteed by the state or secured againststate assets. Due to this broad definition, most private publicpartnership projects (PPP) may fall into the scope of this application,because most public infrastructure projects may require stateguarantees.
Consequently, the status of statecapital under this law poses a great challenge to the current legalframework. As a result, different types of “State capital” outside thetraditional meaning of “state capital” will be restricted. The broadapplication of this law may further delay the implementation of manyprojects to organise tendering, such as joint ventures between foreigninvestors and state owned enterprises, or PPP projects in which theState participates.
Race to the bottom
Time is not the only concern with the Law on Tendering. Quality isalso an issue because it could be compromised by cost. Assessmentmethodology bids as described in Article 38 (1) of the Law on Tenderingintroduced lowest cost methods. This method is commonly used in a numberof developing countries. However, in theory, businesses cannotsimultaneously meet the multiple requirements of better quality andcheaper prices. Regrettably, the new law still follows the “cheap price”approach, which may turn out to be expensive in the long run because oflow product quality.
The low price approach mayalso be paralysed by price adjustment provisions in the granting of theproject. We understand that an adjustment in prices is “unavoidable”because the country’s macro-economy is still unstable. However, theparticular price may be flexible, but the total price should be fixed,since all the risks, such as the escalating price of materials andlabour costs, should be taken into account in the bidding price from thestart. In reality, the adjustment of prices has led to the situationwhere the prices of all projects have been driven up to levels higherthan the bids with many contractors intentionally delaying theconstruction process to have the prices adjusted.
Managing direct appointment of contractors
The method for the direct appointment of contractors should reflectreal world practices but at the same time, promote openness,transparency and prevention of corruption in the bidding process. Thisis a significant change from the former Law on Tendering in that it nowprescribes fixed price, cost evaluation and technical and cost methods.
The consideration should also be made when addingprovisions that ensure objectivity, transparency, efficiency andlimiting of corruption to the lowest price method. For that purpose, thelaw provides that the direct appointment should be adopted in simple orsmall-scale cases. However, what packages should be deemed as simple orsmall-scale? The current regulations are quite unclear, leading toseveral interpretations and different applications. Therefore, thisshould be further considered when applied in reality.
In addition, this new regulation resolves situations where projectswin the bid but fail to meet their deadline because contractors lackcapacity (only winning the bid on the basis of lowest price alone). Theweight given to the lowest bid as a decisive factor and failing to takeinto account other factors, is a main cause for faulty and low qualityprojects. This new regulations also prove that selection of contractorsshould not only be based on the “lowest bid” but also take into accountcontractor capacity, qualifications and experience, and sources ofsupply. However, the regulations on evaluating contractors shouldfurther focus on contractor capacity because “quality of the project asthe first and foremost priority”.
Overall, there aremany positive improvements in the new Law on Tendering, and anintention to enhance investment efficiency and reduce corruption.-VNA
TheLaw on Tendering will come into effect on July 1, 2014. Notable changesinclude the repealing of Section 1, Chapter VI of the Law onConstruction (N°16/2003/QH11) and Article 2 of the Law Amending andSupplementing a Number of Articles of the Law relating to CapitalConstruction Investment (N°38/2009/QH12). With these changes, the newlaw will resolve the overlaps between the Law on Tendering and otherlaws such as the Law on Construction.
Aimed ataddressing certain loopholes and issues related to the current legalframework on procurement, the new Law on Tendering was intended toprovide new provisions to clarify these issues. It devotes a separatechapter to each of the following subjects:
Selectionvia online or e-procurement mechanisms to help simplify the biddingprocess and implement legislative information disclosure requirementsfor better transparency throughout the bidding process and projectimplementation;
Several options, includingapplication of modified criteria (specifically on cost and contractorqualifications), in the evaluation of bidding dossiers by biddingorganisers; and
Involvement of foreign contractorsbeing made subject to two new conditions; namely, that they must (i)work in partnership with a Vietnamese company or sub-contract a localcompany; and (ii) employ only foreign workers when there are noqualified Vietnamese workers available for the project.
As such, the amended provisions are also designed to support localcontractors participating in international projects. In addition, theLaw on Tendering also includes many new terms and some new principlesthat aim to actively enhance competitiveness, decentralise publicprocurement and promote anti-corruption measures. It also introduces anew scope of application for official development assistance (ODA)projects. It is expected that the implementing regulations will rein inODA projects to a more efficient level. Ideally, the regulations aim todetermine the steps towards controlling procurement activities, ensuringfairness between the parties, and limiting corruption.
There are two examples where the Law on Tendering has proven its efficiency.
Total estimated costs and the procedure for bidding supplements
During the process of implementing the winning package, contractorsoften apply to adjust costs of the project scale related to the bid costadjustment. Actual evidence shows that many projects are won by bidsthat are deliberately lower, but which later apply for an adjustment inthe scale of investment leading to increased levels of investment.Therefore, this new regulation is intended to overcome this issue,through the appointment of sub-contractors via bidding. As a result,this regulation should contribute to restricting wastage of the statebudget.
Responsibility of competent persons in bidding and direct appointment of contractor
Regarding the determination of competent persons, the regulation asdescribed in Article 4(3) is a step forward. This allows quick decisionsto be made on small packages. To avoid the downside of this regulation,the responsibility of the authorised individual is clearly defined. As aresult, this restricts the abuse of power by an authorised individual,closes a loophole and creates a healthier bidding environment.
However, apart from progress on this issue, there remain a number ofpractical issues that should be supplemented and rectified in thedecrees implementing the law.
Broad definition of state capital
The provisions of the applicable object are always a matter ofcontroversy and present an interesting point. This law provides thatprocurement activities include “implementation of investment projectsdeveloped by organisations other than those specified in points a and bof this paragraph may use state capital, capital of state-ownedenterprises, 30 per cent or more or less than 30 per cent but more than500 billion VMD in total investment of the project be approved”.
Article 4(44), closely outlines the definition of “state capital”. Thelaw defines state capital to include both equity and loan capital forthe purposes of this provision, including capital of State-ownedenterprises or loans that are guaranteed by the state or secured againststate assets. Due to this broad definition, most private publicpartnership projects (PPP) may fall into the scope of this application,because most public infrastructure projects may require stateguarantees.
Consequently, the status of statecapital under this law poses a great challenge to the current legalframework. As a result, different types of “State capital” outside thetraditional meaning of “state capital” will be restricted. The broadapplication of this law may further delay the implementation of manyprojects to organise tendering, such as joint ventures between foreigninvestors and state owned enterprises, or PPP projects in which theState participates.
Race to the bottom
Time is not the only concern with the Law on Tendering. Quality isalso an issue because it could be compromised by cost. Assessmentmethodology bids as described in Article 38 (1) of the Law on Tenderingintroduced lowest cost methods. This method is commonly used in a numberof developing countries. However, in theory, businesses cannotsimultaneously meet the multiple requirements of better quality andcheaper prices. Regrettably, the new law still follows the “cheap price”approach, which may turn out to be expensive in the long run because oflow product quality.
The low price approach mayalso be paralysed by price adjustment provisions in the granting of theproject. We understand that an adjustment in prices is “unavoidable”because the country’s macro-economy is still unstable. However, theparticular price may be flexible, but the total price should be fixed,since all the risks, such as the escalating price of materials andlabour costs, should be taken into account in the bidding price from thestart. In reality, the adjustment of prices has led to the situationwhere the prices of all projects have been driven up to levels higherthan the bids with many contractors intentionally delaying theconstruction process to have the prices adjusted.
Managing direct appointment of contractors
The method for the direct appointment of contractors should reflectreal world practices but at the same time, promote openness,transparency and prevention of corruption in the bidding process. Thisis a significant change from the former Law on Tendering in that it nowprescribes fixed price, cost evaluation and technical and cost methods.
The consideration should also be made when addingprovisions that ensure objectivity, transparency, efficiency andlimiting of corruption to the lowest price method. For that purpose, thelaw provides that the direct appointment should be adopted in simple orsmall-scale cases. However, what packages should be deemed as simple orsmall-scale? The current regulations are quite unclear, leading toseveral interpretations and different applications. Therefore, thisshould be further considered when applied in reality.
In addition, this new regulation resolves situations where projectswin the bid but fail to meet their deadline because contractors lackcapacity (only winning the bid on the basis of lowest price alone). Theweight given to the lowest bid as a decisive factor and failing to takeinto account other factors, is a main cause for faulty and low qualityprojects. This new regulations also prove that selection of contractorsshould not only be based on the “lowest bid” but also take into accountcontractor capacity, qualifications and experience, and sources ofsupply. However, the regulations on evaluating contractors shouldfurther focus on contractor capacity because “quality of the project asthe first and foremost priority”.
Overall, there aremany positive improvements in the new Law on Tendering, and anintention to enhance investment efficiency and reduce corruption.-VNA
